Is There a Conservative Case for QE?
I say no. An excerpt:
And there you have it, clear as a bell. Paul Krugman couldn’t have said it any better. According to Beckworth, the problem with our economy is that people aren’t spending enough.
This simple idea is very powerful; it permeates our financial press when they wring their hands and wonder if “the consumer” will buy enough Tinkertoys this holiday season “to pull the economy out of recession.” But of course, if spending were really the trick to having a growing economy, then the world would have eliminated poverty long ago. No, it’s production that is the real obstacle; consumption can take care of itself.
As I mentioned in the introduction, this is why intellectually consistent conservatives are defecting to the Austrian camp. They can’t listen to their favorite AM radio hosts or TV pundits blast away at the stupidity of Keynesian deficit spending, and then turn right around and champion Bernanke’s attempt to stimulate aggregate demand. Now, maybe the Austrians are completely wrong, but if so they are at least consistent: They say that fiscal pump priming just makes things worse, because it redirects resources away from private-sector uses and into politically directed channels. Well, Fed inflation does the same thing, except that it also directly distorts the credit market as an added bonus.
This simple idea is very powerful; it permeates our financial press when they wring their hands and wonder if “the consumer” will buy enough Tinkertoys this holiday season “to pull the economy out of recession.”
It’s things like this that are my biggest pet peeve — where people get their values so tangled up that they confuse ends and means. An “economy” that requires people to buy junk they don’t want in order to be “good” is not an economy I care about.
The economy I care about is the one that attempts to maximize what people want and minimize they cost they endure to get it. Any other kind of “economy” is a statistical artifact of no interest but academic.
“lower interest rates and more bank lending — are not so obvious.”
How did the fed cause a housing bubble if you don’t think printing money artificially lowers the interest rate and increases bank lending?
Oh I think it does in general, especially if we start in a normal situation. But it’s possible in a weird situation (like the current one) that the fear of future price inflation more than offsets the extra funds, or that bank lending goes from $0 to $0.
“that the fear of future price inflation more than offsets the extra funds,”
Can you explain this? How does fear of inflation offset extra funds? ( I’m assuming, you mean excess reserves.)
I’ll exaggerate to make the point. Let’s say we start out with a federal funds rate of 5%. The Fed then announces, “We are going to buy $1 quadrillion in new assets, starting with the S&P 500 and then hitting every other major stock exchange around the world, until we own every corporation on the planet.”
I am not sure that the federal funds rate would go down.
I don’t get where your criticism is coming from then. You seem to be making the same argument that David himself has been painstakingly trying to make. That inflation expectations caused the interest rate increase and that lower interest rates isn’t the main channel of monetary policy.
http://macromarketmusings.blogspot.com/2010/12/asking-wrong-question.html
\http://macromarketmusings.blogspot.com/2011/01/why-continuing-bewilderment-about-qe2.html
Anyway, my question was more about the bank lending. If you think that printing money in regular times causes increases bank lending that causes bubbles, what’s the difference now? Why aren’t banks out creating new bubbles with more lending?
Also, do you think interest rates are still artificially low? Is the interest rate now at its “natural rate” where it should be? I ask because you seem to be saying that fed no longer has control over the interest rate and that QE doesn’t lower interest rates.
You criticized Beckworth for supposedly saying that QE lowers interest rates, but Austrians are the ones saying that the fed is currently keeping interest rates artificially low. How’s the fed keeping interest rates artificially low if it’s not for QE. I’m confused.
I took Beckworth to be talking about this particular round of QE. He said matter-of-factly that it lowered interest rates and increased bank lending. So I thought it useful to point out that bank lending wasn’t up (in absolute terms) and interest rates shot up after QE2 was implemented. I wasn’t schooling Beckworth, rather I was making sure lay people knew the real deal. I bet 85% of National Review readers (who read his article, and who aren’t actually businesspeople applying for loans) would have thought bank lending was higher now than, say, August 2008.
There’s no contradiction in me saying the Fed has pushed interest rates way down, but that we are at the point where further injections of reserves will simply fuel price inflation.
Also there is the distinction between real and nominal. If I say, “I think the Fed should let interest rates rise,” I mean it should shrink its balance sheet. I don’t mean it should multiply its balance sheet by 10 in order to boost inflation expectations and thereby raise nominal interest rates.
The stuff about interest rates and bank lending, while interesting, is irrelevant, as Beckworth explicitly says that the purpose of QEII is not to lower interest rates or increase bank lending.
Looking over the article, the only response to Beckworth’s actual argument for QEII I can find is the claim that it is somehow inconsistent to oppose the Obama stimulus bill (which was an example of fiscal stimulus) and support QEII (which is an example of monetary stimulus). By that logic it is equally inconsistent to support tax cuts (which are a form of fiscal stimulus) if you oppose QEII or the Obama stimulus bill. God save us from that kind of consistency.
>The stuff about interest rates and bank lending, while interesting, is irrelevant, as Beckworth explicitly says that the purpose of QEII is not to lower interest rates or increase bank lending.
It isn’t “irrelevant” if QE2 actually affects interest rates and credit expansion, which Beckworth anticipates happening.
You are confusing purpose/intention with actual results, which is the proto-typical statist delusion.
Just because the stated purpose of QE2 is A, that doesn’t mean the real world effects B, C, etc are “irrelevant”.
If I hit you over the head, and said that your real world headache and pain are “irrelevant”, because my stated purpose is to make you smarter, then what would your reply be? Don’t ignore the actual consequences right?
>Looking over the article, the only response to Beckworth’s actual argument for QEII I can find is the claim that it is somehow inconsistent to oppose the Obama stimulus bill (which was an example of fiscal stimulus) and support QEII (which is an example of monetary stimulus). By that logic it is equally inconsistent to support tax cuts (which are a form of fiscal stimulus) if you oppose QEII or the Obama stimulus bill. God save us from that kind of consistency.
Wrong, oh so wrong. Supporting tax cuts is NOT supporting a positive government stimulus program designed to boost aggregate demand, as would be deficits and inflation.
Tax cuts are merely allowing people to keep more of what they earn in the marketplace. Tat cuts are “stimulative” yes, but from the individual-based, free market side, NOT the governmental planning side.
To support tax cuts because they are “stimulative” is VERY DIFFERENT from supporting deficits or inflation because they are allegedly “stimulative”.
You are equivocating the term “stimulus”.
Captain Freedom,
It is irrelevant •to the argument.• Beckworth is saying “yes, QEII will cause A and B, but the real reason to do it is C.” Arguing that it won’t cause A or B may be interesting, but it doesn’t make a difference for his argument.
Btw, did you notice that in the first half of your comment you say that purpose doesn’t matter, what matters is the effect, then in the second half you switch to defending tax cuts by saying the purpose is different?
Blackadder wrote:
The stuff about interest rates and bank lending, while interesting, is irrelevant, as Beckworth explicitly says that the purpose of QEII is not to lower interest rates or increase bank lending.
What in the world are you guys talking about? Here’s Beckworth:
One reason for this confusion is a failure by some conservative commentators to understand the real purpose of QE2. It is not solely about lowering interest rates, increasing bank reserves, and encouraging bank lending, though all of those will occur.
So you’re saying for the purposes of getting NR readers on board with the program, Beckworth could have just as easily written:
One reason for this confusion is a failure by some conservative commentators to understand the real purpose of QE2. It has nothing to do with lowering interest rates, or encouraging bank lending. In fact, interest rates sharply spiked after QE2 went into effect, and bank lending has continued its steady fall since the fall of 2008. Rather, the point of QE2…
There’s no way Beckworth would have written the above, because then NR readers would have said, “What the frick?! Glenn Beck was right! It’s a scam!”
Bob,
I’m saying that if you left the last six words off the Beckworth quote it would change nothing in his argument.
Blackadder wrote:
Looking over the article, the only response to Beckworth’s actual argument for QEII I can find is the claim that it is somehow inconsistent to oppose the Obama stimulus bill (which was an example of fiscal stimulus) and support QEII (which is an example of monetary stimulus). By that logic it is equally inconsistent to support tax cuts (which are a form of fiscal stimulus) if you oppose QEII or the Obama stimulus bill.
Exacto-mundo Blackadder. When conservatives say, “We need tax cuts to put money back in the pockets of consumers, so they can create real jobs,” then yeah that’s Keynesian and I criticize it.
Bob,
Are you really saying that it is inconsistent to support QEII but not the Obama stimulus? There is really no possible way to reconcile the two positions?
Blackadder, c’mon man, work with me here. No I am not saying that. What I’m saying is that Beckworth’s particular argument for QE2 is indistinguishable from Krugman’s. Beckworth has a chart showing total spending is below trend, and that’s what we need to fix. I even provided a link to Krugman who said that exact same thing.
I’m not putting words in their mouths. Sumner explicitly says that this is a problem with aggregate demand.
Bob,
Isn’t that just guilt by association?
Blackadder, this is exhausting. I feel like we’re playing chess. Can you please look 3 moves ahead in our jousting and tell me what you think the important point is that I’ve missed?
Here’s my overall position: Yes, in principle one could be in favor of QEII and oppose the Obama stimulus. For example, if Martians said they would blow up the world unless Bernanke bought $600 billion in bonds, then that would be a perfectly consistent position.
But Beckworth’s case to NR readers (and yes I agree he must have dumbed it down a bit, relative to his own blog) was that there isn’t enough spending. That is exactly what Krugman et al. say about why we needed a fiscal stimulus.
So all of the standard “right wing talk radio” arguments against ObamaStimulus apply to Beckworth’s case for QEII on NR.
>It is irrelevant •to the argument.• Beckworth is saying “yes, QEII will cause A and B, but the real reason to do it is C.” Arguing that it won’t cause A or B may be interesting, but it doesn’t make a difference for his argument.
It is not irrelevant even to his primary argument, since the only way aggregate demand can rise (the subject of his primary argument) is on account of increased bank lending! QE2 is buying long term debt via POMO. The only way that money can increase aggregate demand is by the banks lending this new money out in order to be spent and respent.
In other words, since Beckworth argues that QE2 is designed to boost aggregate spending, and aggregate spending via QE2 can only arise from increased bank lending, it follows that bank lending cannot possibly be irrelevant!
>Btw, did you notice that in the first half of your comment you say that purpose doesn’t matter, what matters is the effect, then in the second half you switch to defending tax cuts by saying the purpose is different?
I never said that “purpose does not matter”. I said that it is an error to ignore all the effects and to only concentrate on purpose/intention, which is what you are implying here by calling some of the various effects of QE2 “irrelevant”.
For QE2 no less than tax cuts, one should look at BOTH the purpose AND the effects.
It seems to me that “spending” and “consuming” are not the same thing. You can do “investment spending” too. Just as “demand” is not the same as “consumption”.
I don’t think you can read these claims about spending as claims about consuming, Bob. Reporters and pundits can get off on a consumption tangent, but that’s not the fundamental argument.
It seems to me that “spending” and “consuming” are not the same thing. You can do “investment spending” too. Just as “demand” is not the same as “consumption”.
It doesn’t matter whether people are *consuming* or *investing* in junk that they don’t want because the Fed so manipulates their incentives that everything else is even worse. If people aren’t consuming and investing because of genuine merit in the goods or the investments, but are only doing it under the threat of their money whithering away — the fact remains that their decisions will be grossly inefficient, and any metric (GDP, employment, whatever) that such actions “improve” will be phony so long as it doesn’t capture this inefficiency.
In case it’s not clear, let’s say the economy only produces mud pies and useless kitchen gadgets, and that the only investment opportunities are in factories that will produce more of these. So, people wisely hold back and don’t play along. But then the Fed says, “No, we need to get spending up, so lets inflate people’s dollars away so they *MUST* buy/invest in whatever’s currently out there.”
Do you see how that would be destructive? Do you see why any metrics purporting “success” of such a policy would have actually lost their informational value in that environment? People buying mud pies and investing in mud pie factories en masse out of fear of inflation is not a “good economy”, and anyone who thinks otherwise — *especially* if based on the official stats — is fundamentally lost.
Silas – right, I’m not saying it ends all disagreement. But it is a really easy way to render a critique largely irrelevant because it only engages a caricature of Keynesianism.
OK DK, I agree with Silas’ response to you, but you’re right, my Tinkertoy jab was a bit unfair.
Well, I’m not trying to whine about what’s “unfair” – it’s just that a lot of people make really specious critiques because they think it’s all about pumping up consumption. Thinking of Keynesianism purely in terms of consumptionism is a gateway drug to vulgar Keynesianism, and nobody benefits from that 🙂
Ya – I think Silas does a good job sketching out the differences that still remain even after this.
I should say – Krugman is one guy among the professional economists that slips VERY easily into blabbing on about consumption. DeLong is usually better about not making that mistake.
I talk about the confusion of consumptionism with Keynesianism here: http://factsandotherstubbornthings.blogspot.com/2010/12/keynesianism-and-consumption-keynesian.html
And about slip-ups from Krugman in this respect here: http://factsandotherstubbornthings.blogspot.com/2010/12/krugman-on-maddow-consumptionism-and.html
Whoa whoa whoa, Daniel_Kuehn — you keep talking about differences that remain, between Austrians and serious Keynesians, even after the distinctions I made in my comment. Is this really true? Are there really respectable, rigorous Keynesians who believe that a “good economy” can include people frantically investing in stuff they regard as junk in order to avoid holding money? Do you seriously believe that such Keynesians are not completely lost when it comes to understanding what a “good economy” should mean?
No – sorry for the confusion. I think the Keynesians who are familiar with ABCT would agree that malinvestments could be a problem and even that they are caused by loose money, but they would:
1. Not consider monetary policy excessively loose right now, or
2. Identify the liquidation of malinvestments as the primary source of depressions.
I’m not arguing that Keynesians agree with the significance of the Austrian argument and disagree on whether those malinvestments are alright. What I’m arguing is that Keynesians disagree on the significance of the Austrian argument and the relevance of malinvestment.
You can’t blame them for liking malinvestments if their claim is that malinvestments are a (relative) non-sequitor.
I, for one, consider myself a “serious” Keynesian, and I do accept the plausibility of a lot of the Austrian argument. But even given that relatively sympathetic position (for a Keynesian, of course), I’m not going to start worrying about malinvestments until underinvestment is not a problem or until monetary policy becomes genuinely loose.
Since Bernanke has been doing his job we are getting there, and perhaps in the not too distant future you’ll hear me saying “this money creation might cause some problems down the road”, but “frantic investment in stuff they regard as junk” is hardly the problem we are struggling with now.
Check back with me again when it is the problem we are struggling with.
@Daniel_Kuehn:
“frantic investment in stuff they regard as junk” is hardly the problem we are struggling with now.
That’s not the argument. The argument is that if people don’t regard the current investment opportunities to be any good (e.g. the banks that aren’t making loans), and that *if* monetary stimulus “works” and gets banks to loan money, then those loans should not be regarded on par with loans make *without* the threat of money being inflated away. In other words, loans made in anticipation of productivity-based returns are good, while loans make to get rid of the “hot potato” of shrinking money are not good.
So QE would only be pumping up a phony metric (investment loans), which does not indicate real economic health, but rather, people frantically investing in junk (FrIIJ).
And if it matters, I think people are, to some degree, FrIIJing right now. For example, the greater number of people holding gold as an inflation hedge. Those people aren’t investing in it for productivity gains — they’re doing it as a defensive measure to protect their savings. This is *not* the kind of investment that signifies sustainable economic growth.
Btw, I read the first link you gave above, and you seem to strongly diverge from mainstream Keynesians in recognizing that fiscal stimulus is a temporary, “fake” fix that will end up exactly where you started. Krugman et al don’t believe this.
Why can’t Beckworth think to extrapolate the “Actual vs. Trend Total Current-Dollar Spending” chart into the future, and see that eventually the monetary system will break down, as the line will eventually approach being vertical? The graph is exponential, and most Misesians know that inflation has to accelerate in order to produce the effects it is intended to produce, but this will eventually break the monetary system. Once we are on the vertical part of that graph, it’s game over.
Does Beckworth really want us to be right ON TOP of that blue line?
Wouldn’t a SUSTAINABLE trend line not be exponential (convex), but “linear with a positive slope”? Any sustained acceleration and continued convexity will eventually lead to monetary breakdown. Isn’t the optimal money spending trend supposed to be linear with positive slope, which incidentally is what gold production looks like?
I am honestly lost on why Beckworth would WANT us to be on the path to monetary breakdown. He should welcome the spending pattern since 2008 that has broken AWAY from the path to breakdown.
If the conservative position is to value a working monetary system, and Beckworth wants to make a conservative case regarding QE2, then he should be “pro-not wanting the whole economic system to blow up”, which means he should be anti-QE2.
Do Austrians admit that there can ever be a problem with aggregate demand, even as a theoretical possibility?
Suppose we were on a gold standard with a 100% reserve requirement. A new kind of termite (call it a “gold bug”) evolves that eats gold, and before it is eradicated 20% of the gold supply has been eaten up. What effect would this have on the economy? Suppose there was a button you could press that would create a comparable amount of gold to what was destroyed. Would Austrians condemn pushing the button as creating malinvestments?
>Do Austrians admit that there can ever be a problem with aggregate demand, even as a theoretical possibility?
What is the problem with aggregate demand?
>Suppose we were on a gold standard with a 100% reserve requirement. A new kind of termite (call it a “gold bug”) evolves that eats gold, and before it is eradicated 20% of the gold supply has been eaten up. What effect would this have on the economy?
Prices would fall, many unsuspecting debtors would likely go bankrupt, but then the economy would readjust to the new monetary conditions.
>Suppose there was a button you could press that would create a comparable amount of gold to what was destroyed. Would Austrians condemn pushing the button as creating malinvestments?
Depends on where the new money enters the economy. If it enters the loan market first, thus depressing interest rates, then it will temporarily alter the economy’s productive structure, after which time the stimulus would run out, the economy would again readjust according to the new monetary conditions.
It appears as though your preconceived conclusion is to want to print money, and you are just trying to get Austrians to agree with you by setting up unrealistic examples.
Suppose I wanted to there to be a dictator of the world. Would it make any sense for me to propose the hypothetical example:
Suppose the Earth is going to be invaded by aliens. Shouldn’t we then turn the world into a fascist military police state so as to give ourselves the best chance at survival?
Captain Freedom,
If someone was arguing that a dictatorship could never be justified under any theoretical circumstances, then such a hypothetical would be relevant.
The question isn’t whether the economy wouldn’t eventually adjust to the fall in the money supply. Even an ardent Keynesian would agree with that. But if you return the money supply to where it would have been absent the gold bugs, you render the painful adjustment process superfluous.
>If someone was arguing that a dictatorship could never be justified under any theoretical circumstances, then such a hypothetical would be relevant.
It is not necessary that someone in the real world argue this. It is only necessary to show the flaw in the logic. I am showing you that if your call is for increased inflation, then seeking to justify it using an illogical hypothetical is very wrong, much like seeking a dictatorship and then justifying it using an illogical premise (alien invasion) is also very wrong.
>The question isn’t whether the economy wouldn’t eventually adjust to the fall in the money supply.
You’re right. This is the SOLUTION to a changed money supply.
>Even an ardent Keynesian would agree with that. But if you return the money supply to where it would have been absent the gold bugs, you render the painful adjustment process superfluous.
Wrong. It is not superfluous. The very pain that a rapid decline in money and spending generates, in the real world, where things matter, is BROUGHT ABOUT by a prior increase in credit expansion induced inflation.
You are imagining an unrealistic world that CANNOT occur, and then using the false powers that exist in this world, to attack what Austrians and “gold bugs” hold to be necessary ON EARTH, where people cannot just push buttons and increase the money supply with no negative economic effects whatsoever.
Again, you need to understand the importance of not ignoring the EFFECTS of monetary inflation. It appears to me that you are trying to solve the problems of painful deflation with exactly what, in the real world, tends to have been brought about in the first place (prior inflation through credit expansion).
The only reason why such deflationary potential exists in the real world is not because of gold eating bugs, but rather because of the fact that out of the total money supply (TMS), a very large and substantial portion of it is fiduciary media, i.e. credit expansion based money.
Under a 100% reserve gold standard, the failure of a debtor will NOT erase from existence any money, for every paper claim to gold is backed fully by gold. In a credit expansion induced inflationary economy like ours, the real world economy, the failure of a debtor erases from existence a particular quantity of money. This is because dollars in our economy are backed by and large by debt, not a fixed commodity.
It is simply fascinating how you are trying to solve the problems of a non-existent cause for deflation under a 100% gold standard, with a magical button, and then use that magical supernatural hypothetical example to justify real world state enforced fiat money inflation, and the destructive EFFECTS it brings.
That’s a great hypothetical question, BA. I think just about all Austrians would agree that it would be right to press the button, so long as it is physical gold that is actually being created (and Ben Bernanke doesn’t push the button).
That would be equivalent to someone developing a spray that killed the termites just before they ate all the gold, and surely no Austrian would object to that.
A more interesting question, though, would be if there weren’t termites, and someone had that button. I analyze the two possible Austrian takes here.
Bob,
That was an excellent article. IMAO, both of the lines of argument you present in the article are correct. If there was was a massive gold find in a society with a 100% reserve gold standard, the effects would be exactly the same as if the Fed had increased the money supply by a corresponding amount. You’d get a boom followed by a bust, with high unemployment, a fall in output, lots of bankruptcies, etc. But since everything happened via purely voluntary transactions, a Rothbardian is committed to saying that this is optimal, for everything is for the best in the best of all possible markets. Personally I think this serves as a reductio of Rothbard’s view, but I always have been a bit of a squish.
Right, because the economy going through an upheaval because of major shifts in relative scarcity of factors of production so as to optimize efficiency in the new environment is totally the same thing as an upheaval because a dude felt like buying a major fraction of the economy with new paper promises. (???)
Bill Woolsey replies to you here:
http://monetaryfreedom-billwoolsey.blogspot.com/2011/01/rothbardian-critique-of-quasi.html
Your thoughts Bob?
Thanks. I need to digest it.
WOOLSEY WRITES:
We cannot “inflate” ourselves into jobs, says Murphy. If we assume that the prices and wages are at the level where the real quantity of money equals the demand to hold it, then expanding the quantity of money will do no good. But if the prices and wages remain too high for the real volume of expenditure to match the productive capacity of the economy, increasing the quantity of money means that prices and wages don’t have to fall as much as they otherwise would. In the limit, prices and wages don’t need to fall at all and, in fact, can continue to rise at their previous trend.
This all sounds like Hayek explaining Keynes’ ad hoc “general theory”:
The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages.
Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime wages, or inflated wages, could buy much more. Wages had not come down.
Now his first argument was wages must come down. Then the conclusion was that is politically impossible, so we must find another way, instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages.
http://hayekcenter.org/?p=2701
A.K.A. “the printing money” by “The Ben Bernank”.
http://www.youtube.com/watch?v=PTUY16CkS-k
That’s not Hayek explaining Keynes. That’s Hayek agreeing with Keynes.
That’s not Hayek explaining Keynes. That’s Hayek agreeing with Keynes.
I don’t think so. This is my recording and I’ve had 33+ years to listen to it. Did you listen to the entire clip?:
Mr. Hayek: Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:
“Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.
Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation. The only thing I blamed Keynes for is to making his theory more attractive than effective. He called it the general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.
Mr. Buckley: It was an ad hoc –
Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And If I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.
Mr. Buckley: Like Nixon.
Mr. Hayek: No, no. (laughter).
Mr. Buckley: What did Nixon mean when he said he was a Keynesian in your understanding, Mr. Roche?
[Roche’s answer omitted]
Mr. Hayek: You’re perfectly right, but I’d like to add one thing. You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you’re doing good to the people in general. The politicians didn’t want to hear anything more than that – to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.
“A discussion with Friedrich A. von Hayek: held at the American Enterprise Institute on April 9, 1975”
http://books.google.com/books?id=VGgaAAAAMAAJ
Hayek: “Let me say, first, that there are two circumstances in which changes in aggregate demand are indeed the dominating factor in determining the level of unemployment and these two circumstances have governed the development of the theory. The first one was an accidental historic situation, but an historic situation that determined the climate of opinion in the country which then dominated economic theory. In 1925, Great Britain had made a laudable attempt to return to Great Britain had made a laudable attempt to return to gold but mistakenly to do so at the former parity. This policy created a situation where real wages were generally too high because they had been artificially raised by the revaluation of the pound. In consequence, British industry, largely dependent on exports, had become unable to compete in the world market. In this situation, the restoration of employment required a reduction of real wages which could be achieved by a achieved by a general rise of prices.
The second situation in which it is true that an increase of employment requires an increase in aggregate demand is found in the later stages of a depression when in consequence of the appearance of extensive unemployment the economy frequently is subjected to a cumulative process of contraction of secondary deflation which may go on for a very long time.
I am the last to deny, or rather, I am today the last to deny, that in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate. I probably ought to add a word of explanation. I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should even then have understood that this possibility no longer existed. I think it disappeared in 1931 when the British government abandoned its attempt to bring wages down by deflation, just when it seemed about to succeed. After that attempt had been abandoned, there was no hope that it would ever again be possible to break the rigidity of wages in that way. I still believe that we shall not get a functioning economy until wages again become flexible but I think that we shall have to find different techniques for that purpose. I would no longer maintain, as I did in the early ’30s, that for this reason, and for this reason only, a short period of deflation might be desirable. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation. So much for the first reason for the widespread acceptance of a direct a direct relation between aggregate demand and unemployment: it is indeed the dominating phenomenon in the later stages of a depression.”
should say:
“In 1925, Great Britain had made a laudable attempt to return to gold but mistakenly to do so at the former parity. “
I guess you told me.
I suppose that’s why I’m a Rothbardian, not a Hayekian.
There wouldn’t have been a sticky wages “deflation” problem in the first place if there hadn’t been a funny money dilution boom in the first place to artificially bid up wages and prices. The inevitable bust that follows is always trouble.
I really don’t understand why someone couldn’t just speak the truth to the workers. What is proposed here is tricking them into accepting lower real wages without them realizing what is happening. Typical Keynesian fraud.
Don’t worry Bob. The Hayek and Robbins of 1932 or so were much cooler than in their later years. Sort of like classic rock.
I guess ol’ Hayek was indeed “swept off my feet as were most of the people”.
Like Nixon.
Bob,
The problem is not simply that nobody was willing to explain the truth to workers… the problem was that governments at the time were actively preventing wage decreases through specific policies. In the States the government did its best to persuade employers to cut hours rather than wages, along with several other direct interventions.
Wow, good to see someone else making the same point I keep making to no avail. I would have replied to J_Murray’s insightful post, but I’ve been banned … again.
What did you do this time?
Or am I blaming the victim?
Your “biker bar” comment was hilarious.
What biker bar comment?
This one Silas.
http://blog.mises.org/15357/taking-seriously-the-excess-money-demand-problem-a-reply-to-robert-murphy/#comment-752862
Thanks, Daniel_Hewitt; in my vanity I didn’t realize who you were talking to or what exchange you were referring to.
If it’s not too much trouble, could you (or anyone else reading this) pass along my endorsement of J_Murray’s comment that I linked above? :-[
Silas, I cannot get the permalink to your comment above to work properly.
I got this to work:
http://consultingbyrpm.com/blog/2011/01/is-there-a-conservative-case-for-qe.html/comment-page-1#comment-10316
In any case, if you’re trying to reply to J_Murray to point to my comment,
a) Thanks!
b) Worst comes to worst, a link to this page is fine.
Done!
Mucho appreciado![1]
[1] May not actually be Spanish for “Much appreciated”, but that was the intended meaning.
IP arguments again, eg. here. I actually kept it pretty civil this time as these things go, except maybe in this thread. (In the latter case, the true crime is probably detracting from the Mises U cash cow.) (YIKES! Looks like they’ve sinced deleted the whole exchange!)
And interestingly enough, Stephan_Kinsella didn’t want me banned; Jeffrey_Tucker did it, against his wishes (per emails I got from both of them).
(Btw, Stephan_Kinsella falsely represented you as being firmly in the anti-IP camp, despite your having endorsed the authorization of violence against those who would instantiate your Politically Incorrect Guides without the publisher’s permission, and despite you saying you’re on the fence about IP. If you care about that kind of thing.)
I really hope the spam filter lets this through.
Silas, please provide a link to where I “endorsed the authorization of violence.” Those are very strong views to attribute to anyone, let alone a self-professed pacifist, so please give readers the link so they can see exactly what I said.
Sorry, I can’t link to the text of the contract you signed with Regnery (sp), but you can look at it for yourself. In that contract, you were transferring, to the publisher, your legal right to violently stop copyright infringement of the content of those texts. Ergo, you were authorizing violence.
(And had you insisted that the publisher _not_ use any method predicated on violence to stop infringers, they wouldn’t have given you the deal in the first place.)
Do you just not know what these contracts mean, or …?
For the record, they didn’t delete it… they just moved it here: http://blog.mises.org/15276/teaching-an-online-mises-academy-course-2/
Caught the endorsement, just remember to run the “celebrity endorsement” sticker down at the bottom. 😛
The question of QE 2, in 2010:4, requires the context of prior Fed & gov’t actions:
loose money, Fannie & Freddie & excess mortgage speculation (plus CRA), housing bubble 2002-2006,
house construction crash 2007-2010+, financial crash 2008, TARP (bailout for irresponsible rich bankers), Fed Bailouts for GM & Chrysler and specific companies, plus massive gov’t spending (on wasteful stuff?).
In this context QE 2 might be less bad than no QE2.